Covestor

Silver could gain significantly in coming months

Michael Arold — Fri, 10 Feb 2012 07:29:26 +0000

The model portfolio started the year on a positive note, gaining 5.7 percent in the month of January.

In January, it paid to not focus too much on headlines and instead evaluate market internals. Stocks behaved very similar to earlier market bottoms: volatility had been declining for weeks, new leading stocks emerged and their number grew with every trading day. In a healthy market, indices not only move higher, but more and more stocks are participating as well. The challenge however is that headlines are usually still negative during this phase, so one has to ignore market pundits on major TV channels (it pays to always ignore them anyways).

Granted, stocks appear overbought going into February. However, Mark Minervini, a highly respected trader who was interviewed in the investment classic Stock Market Wizards, recently characterized the latest price action as a "Lockout Rally.”. Such a move can be challenging because it offers no major pullback opportunities to enter the markets. Psychologically, it can be very difficult to buy new highs, but that's exactly what traders need to do in such a phase.

A game changer for the markets was the FOMC statement on January 25. Even though economic numbers came in better than expected in recent months, the Fed seemed to maintain a pessimistic stance. Bernanke was laying the groundwork for more quantitative easing ("QE3"), which is bearish for the dollar but bullish for commodities and basic materials. I therefore focused on related stocks: going into February, the Covestor model portfolio is long Freeport (FCX), Potash (POT) and Molycorp (MCP). I'm also long Silver (SLV), which is in an extremely interesting technical position and could gain significantly in the coming months.

Another driver, believe it or not, could be the Euro: a record number of futures are held short by large traders, which is usually a contrarian sign. My position is well known: politicians (especially German) will do everything to keep the Euro alive, due to well known events in recent history. In fact, negative news from Europe at the end of the month barely affected U.S. stocks and was obviously considered a buying opportunity by market participants. Correlation between the S&P 500 and the Euro has been very high, so a stronger Euro could mean higher stock prices.

Overall, underlying investor mood is not overly bullish yet, which points to potentially higher prices ahead. I am tracking a handful of sentiment indicators, but none of them is showing that the crowd is overly excited about recent stock price gains. I would sell more aggressively when investors begin to think that "only the sky is the limit.”

Covestor Ltd. is a registered Investment Advisor. Covestor Investment Management licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for investment models available upon request. Additional important disclosures are available here. For information about Covestor and its services, go to our website, Covestor Investment Management or contact Covestor Client Services at (866) 825-3005, x703.

This rally appears to have real legs

Lelio Vrancovich — Fri, 10 Feb 2012 07:22:17 +0000

Author: Lelio Vrancovich

Covestor model: Technical ETFs

As the markets continue to move higher, a growing number of voices fret about an impending correction. I wonder if these are the same people that just three months ago were advising the general public to sell stocks and move into cash - right at the near term bottom.

The bottom line is that as of early February we have increasing numbers of stocks reaching 52 week highs and a decreasing number of 52 week lows. For as long as that scenario continues to be true, I believe it makes no sense to be overly concerned about a pullback. We expect there will be a correction at some point, but my guess is that buying that correction will be the right move as opposed to selling it.

As far as the portfolio is concerned, we will continue to hold our current positions up until conditions change.

My six Concentrated GARP stocks could have a strong 2012

Yale Bock — Fri, 10 Feb 2012 07:11:43 +0000

Author: Yale Bock, Y H & C Investments

Covestor models: Concentrated GARP, Long Term GARP

Disclosure: Long GIGM, DGI, CLGX, CASS, DLB, JMBA

January was a good month for the portfolio, as a few of the companies saw a modest rise in their stock prices. The portfolio is still down a great deal since inception, but I believe 2012 could prove quite interesting for several of the holdings. Already, we have seen a few reasons why results could be vastly different. At the same time, until the portfolio performs substantially better, the returns since inception have been disappointing. As Bill Parcells says ‘You are what you are.’ Until the performance changes, I don’t want to call a turd a raisin, as Charlie Munger puts it.

Covestor Portfolio: The Reasons for Owning the Portfolio Holdings

1. Gigamedia: At least the management at this company keeps it interesting. For the third year in a row, they have a new CEO - imagine that! Actually, the hire looks pretty good, as he has a nice background in Silicon Valley and plenty of technology experience in gaming. Of course, time will tell and we all know not to get too excited about GIGM. As reported last month, the Justice Department announced they have a different interpretation of the Wire Act, the underlying law used to prevent internet poker. As a result, individual states in the United States now believe they will be able to offer internet poker legally, and Gigamedia has an operation based in Massachusetts which could be able to partner with a big casino group and get a piece of the action. If the Spongebob game ever gets released as it is supposed to, it is not out of the realm of possibility to see a whole different result with this company, but don’t hold your breath just yet.

2. Digital Globe: The company had one piece of news in January - they added to their management team.

3. Corelogic: The company increased their guidance on January 19, 2012 and the stock had a little pop, but has since tailed off a bit. Here is the release.

4. Cass Information Systems: Reported better than expected earnings on January 26, 2011 of $0.53 a share for the 4th quarter 2011 and $2.21 for the entire year. Revenues increased almost 11% for the year, with EPS up 13.3%.

5. Dolby Laboratories: The earnings report on January 31, 2011 showed revenue for the 4th quarter of 2011 at $233.4 million, down 3.8% from the same quarter in 2010. EPS came in at $0.67 a share, down from $0.76 a year ago. Here is a link to the release.

6. Jamba Juice: The Company reported net income of $4.1 million on revenues of $57.1 million, a decrease year over year of 13% due to the closing of company owned stores. The company had a good quarter again operationally, as same store sales rose by 3.7%, and both licensed and company owned stores had positive comps. Jamba is slowly building their franchise and licensing strength, opening in new territories, and starting new marketing initiatives. They continue to add new products to their licensing programs, and their licensing and franchise divisions should be a driver of better earnings over the next few years. I still believe 2012 should be a very good year for the company, and with the stock having been beaten up, it does provide a possible opportunity for those who believe in the Jamba strategy and health and wellness market. Starbucks also recently bought a company (Evolution Fresh) in this market to better position themselves for possible growth in this target market. Jamba Juice recently announced it expanded its distribution agreements with US Foods and Sysco’s Sygma division to help improve their supply chain efficiency.

IBM continues to confound and amaze

Barry Randall — Thu, 09 Feb 2012 08:36:37 +0000

Author: Barry Randall, Crabtree Asset Management

Covestor model: Crabtree Technology

January 2012 was a strong month not only for the Crabtree Technology model, but also for the capital markets as a whole. A steady stream of solid economic news, such as three-year lows in the weekly U. S. unemployment claims, bolstered confidence in general and investor confidence in particular.

In the world of technology, however, there were hits and misses, particularly when it came to reporting December quarter earnings. There were very solid reports from Apple, IBM and Netflix. Conversely, Google and Amazon disappointed, causing each company’s stock to decline sharply the day after each reported numbers.

Among Crabtree holdings, IBM (IBM), Electronics for Imaging (EFII) and OSI Systems (OSIS) were the standouts, in each case exceeding expectations and offering forward outlooks ahead of expectations – either their own prior outlook, or Wall Street estimates.

Disappointments came from Symantec (SYMC) and Electro Scientific Industries (ESIO), though neither of those two companies’ quarters would be considered to be “blow-ups” in Wall Street parlance.

Nonetheless, February will bring with it a rebalancing of the Crabtree Fund, and those companies failing to exhibit the key Crabtree characteristics (e.g. execution on their business model) will be swapped out for those still possessing them. Of course, earnings season for the December quarter won’t be over until mid-February, so we’ll have more to say in next month’s report, plus an update on the fund’s composition, which will have changed by then.

Because we don’t really “react” to the general economic and financial news flow by selling current holdings or buying new ones, we typically don’t pay too much attention to the daily headlines. However, we do have strong feelings about certain companies. Here are a few words about this month’s featured Crabtree holding, IBM.

IBM continues to confound and amaze people. The most recent surprise was when notoriously tech-averse billionaire Warren Buffett took a large position (is there any other kind of Buffett position?). But we think that Mr. Buffett simply came to understand what we have known for many years: IBM doesn’t manufacture business machines. They manufacture earnings. They do so as follows (source - IBM reports and Yahoo Finance):

IBM runs a very profitable technology services business ($40.9 billion in 2011 revenue; 35% gross margins), and charges their service clients for the computer hardware and software they install, generating…
…prodigious cash flow (18.5% operating cash flow margins) with which they…
…buy back stock (paid $15 billion in 2011) and …
…acquire more high-profit margin software companies (spent $1.8B in 2011) whose products they sell…
…through their very profitable technology services business, repeating this cycle over and over.

To put some more numbers to this amazing machine, consider that at the end of 2011, IBM had 1.189 billion shares outstanding, down from 1.605 billion shares at the end of 2005. That’s an astounding 26% decline in the share base, or a 35% boost to earnings per share, absent any other effect.

IBM hasn’t really amazed us at Crabtree. We cottoned to their secret strategy years ago. It is an example of why we generally pay no attention whatsoever to a “tech” company’s technology and focus almost exclusively on a company’s business model and market opportunity. Sure, IBM created Watson, their Jeopardy-winning supercomputer, but it is the aforementioned acquisition/cash flow/buy-back cycle that keeps us as investors. IBM has been a holding in the Crabtree Fund since we started it nearly three years ago. Welcome aboard Warren!

Well, that’s all for this month. February will bring many more earnings reports. Plus, Facebook just filed for an IPO yesterday, so we’ll be digging into their SEC filings. We’ll have completed our quarterly re-balancing of the Crabtree Fund by the end of February, so we’ll let you know about what’s new in the portfolio. See you then!

Pandora's more attractive than other recent web IPOs

Mitch Jones — Thu, 09 Feb 2012 08:24:58 +0000

Author: Mitch Jones

Covestor model: Price Momentum

2012 is now well on its way. One notable event of January was taking my two boys, ages 2 and 4, to experience the Fort Worth Stock Show and Rodeo. I explained to them what the "stock" there is, but now my boys just think I trade cows and sheep on the computer every day. Our favorite part of the show was seeing the beautiful black Limousin cattle. They are large, muscular and sleek. And they seemed to be popular at the auction.

Likewise, Pandora (P) stock was popular in January. It turned out to be my best trade in a lackluster month. After several months in a typical post-IPO slump, Pandora is up sharply so far this year. I do not own it now, but long term I think it could be a good play. I think it is more fairly valued than other recent IPOs, such as Groupon (GRPN) and Linked In (LNKD). While each has a valuable user base, I think Pandora has a service that is more difficult for another startup to replicate. It has spent years tweaking its smart algorithm for choosing songs users actually like.

On the flip side, I had some bad luck with First Financial Corporation (FFKY). The banking company has been on a steady decline in the last five years, but shares of the company spiked recently. The buy turned out to be poorly timed, coming at the top of a week long run up.

I currently have no positions in any of the stocks mentioned (including Limousin cattle) and have no plans to initiate a position in them.

Why we remain invested in the U.S. dollar only

Terence Grennon — Thu, 09 Feb 2012 08:15:31 +0000

Author: TG Asset Management LLC

Covestor portfolios: Tactical All Asset and Tactical Growth

Bottom Line: Two out of three strategy factors remain bearish. Protection of assets is essential. An allocation of 100% to the U.S. Dollar is recommended.

- Long-Term Stock Pattern (3-5 yrs): Bearish, Lower stock returns ahead

- Intermediate-Term Stock Trend (1 year): Bullish, Topping stock prices

- Short-Term Stock Volatility (30 days): Bearish, Lower stock prices ahead

- Inflation:

Developed Economies - At or Above Target (except Japan)

Emerging Economies - Above Target

CURRENT ASSET ALLOCATION OBJECTIVE: PROTECTION

Fundamental, Technical, Trend, & Volatility Indicators

Fundamentally, the S&P 500 is trading at a 21.92 P/E (Shilller approach) as of January 31, a 37% premium over the long-term average of 16. Lower than average returns on stocks over the next 5-10 years are therefore expected.

Strategy Factors

PATTERN: BEARISH; Recent upward stock trends are in the context of a secular bear. Prices should remain below their May 2 highs. Once they start down again, I expect them to reach new lows.

TREND: BULLISH; Stocks have remained above their 200 day moving average since early January. We believe stocks are in a topping process and should start lower soon.

VOLATILITY: BEARISH; The S&P 500 VIX “fear index” closed in bearish territory at the end of January. Prices should remain elevated as stocks continue their topping process.

Strategy

Protection of assets is warranted at this time. An allocation to the U.S. dollar is suitable. Our Covestor model is nearly fully allocated to the PowerShares DB US Dollar Index Bullish Fund (UUP).

Warm Regards,

Terence P. Grennon

Expecting a market pullback sometime soon

Beau Wolinsky — Thu, 09 Feb 2012 08:09:56 +0000

Author: Beau Wolinsky, KC Capital Management

Covestor model: Quantitative ETF

In January we saw a seasonably strong rally, despite indications that we were overbought for nearly all of the month. When the market came down a little before the end of the month, we got a sign that it was oversold. The volatility that it took to reach this level of oversold condition was very small.

We took a long position in the ProShares UltraPro QQQ (TQQQ) on January 31, after selling our UltraPro Short QQQ (SQQQ) position on January 25. We reversed short to long as I think the rally this month is poised to continue for at least 5 more trading days, followed by the first pullback of more than 4% for 2012. I am hoping to capture most of the remaining upside in this rally. It seems the whisper number for NASDAQ 100 index value is 2,500.

Our models did not have as much edge this month because neither of our short entries (long SQQQ) were accompanied by Price Physics signals. Typically, we find waiting for confirmation of those will lead to more robust results, but we’ve found the performance you lose by waiting for those is really not worth the risk of missing potentially profitable opportunities.

While we know we have a lot more edge whenever we have Price Physics signals to accompany our pairs trades, I feel especially that whenever we do try to time our pairs entries with Price Physics entries the exits will typically lead to more frequent trades that shouldn’t be part of a model that cannot daytrade. Therefore, unless we’re placing a discretionary trade based on our pairs trades, we will use our Price Physics methods to help us find opportune exits timing the market with a combination of the two strategies.

I’ve generally preferred to take all pairs signals, and even though it’s unfortunate to have been stopped out of our trades, the additional losses we might have taken had we not used the pairs signals for entries would also mean additional opportunities in the future could be missed. I would rather trade a highly robust model most of the time than miss profitable trade setups simply because both of our models do not agree.

The model had a good 2011, but we missed most of the variants of more profitable trades in the latter half of the year. We modified our models in the last four trades of 2011, and while we didn’t have as strong results as we had hoped, I am confident we can capture a decent since inception return - in the 30-50% range - before our first annual year of performance is recorded on Covestor.

Adding equities, as this bull move does not appear to be over

Joseph Ollis — Thu, 09 Feb 2012 08:02:10 +0000

Author: Joseph Ollis, Everyday Capital

Covestor portfolio: Everyday Portfolio

The Everyday Portfolio selects up to 11 assets from a diversified basket of asset classes on the final trading day of each month. Below is the new allocation for the month of February as well as the performance numbers from January. Click to read more about the Everyday Portfolio strategy.

We are now tracking and rebalancing from the end of the first trading day of the month instead of the last trading day of the month, for reasons I explained in my last post.

The Everyday Portfolio underperformed the S&P 500 in January, up 2.9% vs. the index’s 4.4% rise, due to its overweighting of less volatile assets.

February 2012 Portfolio Allocation

For the month of February, the model continues to increase equity exposure to leading asset classes, including a new position in emerging markets.

Commentary

I mentioned in the beginning of the year that the portfolio is starting to increase exposure to equity as volatility lowered, suggesting a bullish move. Many market talking heads continued their dire predictions going into 2012 and the market showed them wrong by having one of the best January returns in years. Though the portfolio underperformed the market as it rallied higher, it still managed to capture a good portion of the gain.

Interestingly, the volatility of the market has continued to trend lower – suggesting that a sustained move higher could be possible. I say ‘could’ because the market has managed to move up to significant overhead resistance and it would be healthy from a technical perspective if it consolidated at this point. That said, the market never does what it should – ask those market talking heads who still forecast dire outcomes for 2012 and say to not ‘follow the January barometer,’ whatever that hocus-pokus is.

The portfolio added to its equity exposure in February, but by just a slight margin, adding back emerging markets and gold. We also switched out Malaysia in favor of base metals. The fact that base metals are leading the market from the standpoint of consistent low volatility returns suggests to me that this bull move is not yet over.

The portfolio is continued to be positioned about 60% in bonds and 40% in equities, despite the recent market performance. Though this is automatic it also seems prudent as the market is facing resistance. Another month of low volatility moves and the portfolio will significantly ramp up its position in equities. If resistance turns out to be stronger, the portfolio will adjust accordingly.

Regardless, I believe the Everyday Portfolio is doing what it should – making it easier to sleep at night.

Two great recent events - join us online for the next one!

Kalen Holliday — Thu, 09 Feb 2012 07:38:20 +0000

By Kalen Holliday, Head of Communications at Covestor

To kick off 2012, we hosted a series of events, starting with live "portfolio positioning" events in Manhattan and Tarrytown, NY. These casual gatherings allowed Covestor model managers to meet current and prospective clients in a face-to-face setting. Registered investment advisers provided mini financial makeovers and answered questions. We also had a chance to show off our new website and share 2012 investment outlooks from several model managers.

Seven Covestor staff members attended the New York area events, including our CEO Asheesh Advani. It was a great chance for us to mingle with our model managers and meet potential clients. As an online company, we are used to communicating with customers and managers via email or Skype. These events provide a terrific opportunity for us to tell the Covestor story in person and get live feedback and thoughts, so we really enjoyed and appreciated it as well.

Our January 18th event attracted attendees from Connecticut, New Jersey and New York and featured model managers from as far away as Florida. The January 31st event took place at the office of Union Square Ventures, one of our venture capital backers. Here are some photos from the events - click to enlarge:

Covestor model managers participating in the events - in person or via video - included:

Dan Beckerman (Beckerman Institutional)
Bob Gay (GEARS)
Jerry Gehman
Vinay Munikoti (System Research)
Derek Pilecki (Gator Capital)
Robert Santarpia (U.S. Wealth Group)
Tim Sykes
Tom Yorke (Oceanic Capital)

And here's some good news: you can join our next event wherever you are! We're hosting a virtual conference, accessible worldwide from any PC, on March 20 and 21. This online-only event features presentations from Covestor and our model managers as well as financial industry experts from E*TRADE, Yale University, Stock Twits and more than a dozen other organizations. REGISTER NOW for this free conference. It's going to be great - see you there.

~ Kalen

Why I'm buying this foreign high yielder

Bill DeShurko — Wed, 08 Feb 2012 14:55:51 +0000

Author: Bill DeShurko, 401 Advisor

Covestor model: Dividend and Income Plus

Disclosure: Long VALE

A good portion of my day is filled up scouring several online sites for articles related to dividend stocks. It’s always good to get fresh ideas, and to see what others are saying about our current or prospective holdings. Recently, an article at Business Insider caught my eye, “SoGen Identifies The 40 Best Dividend Stocks in The World”. Pretty bold statement. But for the most part I like SocGen’s economic work, and I am interested in adding some foreign exposure to our holdings in our Covestor Dividend and Income Plus portfolio. After wading through 39 of 40 slides, I did find something that interested me.

The last slide identifies Vale (Pref A), the Brazilian miner, as a stock expected to “…boost its dividend by 32% this year.” SocGen also states its 2011 yield as 7.4%. I’d take a 32% increase on that.

My investment thesis for the year is that the U.S. economy is in a recovery mode, and while China has political issues, economically they have likely bottomed. What had me puzzled is how I missed a commodity stock with a 7.4% yield. When I am looking for candidates online, I always have several other sites open on my browser where I can get more information on the stock and see if it passes several of my screens to become a legitimate buy candidate. I soon saw why I had overlooked Vale.

For the US-traded ADRs of Vale (VALE), according to MarketWatch, Vale's dividend yield is "N/A". At Yahoo Finance, it's 0.2%. Zacks.com shows it at .11%, as does Finviz. So what’s up? Finally at Morningstar I got my answer. Morningstar indicates that in 2011 their only regular dividend payment was in October, at $.0283 per share. However, during the course of the year they also paid out a total of $1.3846 per share in “special dividends”. This is not included in the dividends yield as reported by most services. So now the question is: How likely are they to continue paying their special dividend?

Back to the Business Insider article, which interprets the dividend yield as 3.5%, after foreign taxes and before special dividend payments. Since I get different dividend totals from Morningstar and Yahoo, I’ll go with the 3.5%. Zacks.com calculates a current P/E of 4.9 with historic P/E’s ranging from 31 to 4.1 over the last 5 years.

Vale is the largest iron ore mining company in the world, primarily providing essential metals to the steel industry.

Here is why we have been adding Vale to our Covestor portfolio and client accounts. The Chinese will continue to buy cars. The pace could slow in a recession, but the demand should grow. Only the rate of demand growth is in question. In the U.S., the average age of cars and light trucks is 10.6 years, up significantly from 8.4 years in 1996. Car sales are a big part of steel demand, and car demand should continue to rise, fueled domestically by low interest rates. Vale's earnings are projected to grow by a modest 4.3%, but that is growth, which theoretically supports the same, or higher “special dividends” that were paid out in 2011. A P/E of 4.9 is ridiculously low for a commodity producer when global federal bankers are all on a money printing binge. And Vale pays their dividends in Brazilian Reals, adding a currency bet to the investment.

Caveat: I really don’t know what the dividend payments from Vale will add up to this year, but I’m happy with the 3.5% quoted by SocGen, and anything higher is a bonus. I like the capital growth potential. I am not buying Vale for clients who are living off their dividends, as the regular dividend is too low, and the special dividends less predictable. But for clients looking to grow their portfolios through a combination of capital growth and dividend reinvestment, Vale looks like a very undervalued stock. By paying dividends in a strong foreign currency it adds Brazilian currency exposure to my portfolios. And with its fortunes resting partly on Chinese demand it adds a second foreign component. This is the type of foreign exposure I like for diversification.